Bank Charters: Top Things Prospective Applicants Should Know

As the influence of technology grows in the midst of the mobile technology revolution and a global pandemic, so do the roles financial technology firms and servicers play in the American financial system. While most fintech companies partner with banks and credit unions to bring their products and innovation to market today, some, propelled by a favorable regulatory environment, have decided to forge their own future and convert into banks themselves.   

Throughout 2020 and early 2021, dozens of fintech firms, and even a few non-fintech companies, have applied for charters or have publicly shared intentions to do so. If you’re an industry observer—or read any financial newspaper regularly for that matter—it appears that many fintech firms are applying to become financial institutions. There are already more than 5,000 of them in the country. Can’t be that hard, right?

Prospective applicants should take the five following considerations before making the (big) jump for a bank charter:

  • Different charters for different banks: Prospective applicants should understand the various charters and their complex regulatory framework, considering that the type of charter ultimately granted will be the primary driver of what an applicant’s bank can and can’t do. There are various types of bank charters in the United States. At the federal level, national bank charters issued by the Office of the Comptroller of the Currency (OCC) are popular. Applicants can also pursue state bank charters in virtually every state, although interstate banking regulation and limitations deter most applicants. One outlier, the state of Utah, issues charters for industrial banks, allowing companies to call themselves banks while remaining exempt from the technical definition of a “bank” under the Bank Holding Company Act and other banking requirements of the Glass-Steagall Act. This type of charter is one of a kind and has largely been grandfathered in—less than two dozen industrial banks operate today, and the state of Utah continues to accept and grant new industrial banks, even though industrial banks come with certain limitations of their own. Federal Deposit Insurance Corporation (FDIC) insurance is indispensable for banks; there’s an application for that too, and it can usually be done concurrently with other state or federal charter applications.
  • Business case: Applicants should understand their target market, the size of the market, the scope of their product, and the ultimate mission of their prospective banks. These considerations must be well documented for leadership, investors, and the applicable regulatory authorities—and is requested by regulators throughout the charter approval process. 
  • Costs: Attaining a charter is not an affordable endeavor. Applicants should consider not only the actual costs associated with hiring the legal and business bandwidth to support the initial application and evaluation but also the long-term operational and staffing costs of launching and maintaining a de novo bank in its infancy.
  • Timelines: Bank charter applications, evaluation, and approvals take a long time; timelines over 12 months are common. This is primarily due to the already lengthy step-by-step process associated with bank charter applications, but it can also be caused by applicant resource constraints, issues requiring remediation, and politics.
  • Other options: While the option is not ideal, some sponsor banks and technology firms entertain lucrative, short-term banking relationships. Sponsor banks and their technology providers are equipped and well-versed in launching innovative demand deposit, savings, credit, lending, or even wealth management programs that can later be converted once an applicant’s bank is in operation. Other applicants have forged a different path altogether, acquiring existing financial institutions and leveraging the incumbent operations, licensing, and staffing to bring their products and services to market faster.

While the process may feel grueling and the future unforeseeable, being prepared with the internal and external expertise will make all the difference.

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